Talking Economics: Eurozone forecasts on track

The European Central Bank's injection of stimulus and the fall in energy prices continue to provide support for the eurozone, but UK growth is likely to be hurt by austerity measures following the Conservatives' win in the May general election.

17/06/2015

Azad Zangana

Senior European Economist and Strategist

30 MinutesUnstructured Learning Time

Eurozone forecast: small upgrades

We have nudged up our growth estimates for the eurozone, but mostly due to base effects and better-than-expected recent data.

We expect growth to rise from 0.9% in 2014 to 1.4% in 2015 (previously 1.3%), and then increase further to 1.6% in 2016 (unchanged).

In terms of inflation, less deflation in the first quarter helped lift the annual average, while a slightly faster-than-anticipated rise in global energy prices will also help.

We expect 2015 inflation of 0.2% (from 0.1% previously), with the 2016 forecast unchanged at 1.2%.

In terms of monetary policy, we continue to expect the European Central Bank to buy €60 billion of assets per month until September 2016, with interest rates kept on hold.

UK forecast: rate hike delayed

The UK growth forecast has been downgraded for 2015 from 2.6% to 2.2%, partly due to the much weaker-than-expected outturn in the first quarter, but also due to negative base effects caused by an upward revision to 2014.

We have lowered our inflation expectations from 0.6% to 0.4% for 2015 due to weaker core inflation (which is partly as a result of the strength of the pound versus the euro helping to lower import price inflation).

The Bank of England (BoE) will not be able to raise interest rates while inflation is still below 1% ( the BoE's lower bound of its target).

So we have pushed out our expectations for the first rate hike from November 2015 to February 2016. We forecast the BoE to then hike each quarter by 0.25%, taking the policy rate to 1.50% by the end of 2016.

The eurozone’s flash estimate for the harmonised index of consumer prices (HICP) showed an annual increase of 0.3% in May – the first increase since November 2014, backing up our view that deflation is not a major concern for the region.

Schroders Chief Economist Keith Wade sees five key themes shaping the macroeconomic landscape and supporting risk assets over the next year including energy prices, central bank monetary policy and the hunt for yield.

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